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States as the new heroes?

States’ Role in Environmental Policy Implementation of federal laws – Wisconsin's Green Tier program – MN toxic pollution prevention act – Minnesota and Idaho effluent-trading schemes Source of policy innovation and experimentation – Saratoga Springs- Complete Streets Program – Solar farm on landfill

It is time for public policy makers to unleash America’s potential to solve its remaining and emerging environmental problems.... With Congressional direction, and adequate infrastructure, the states can create a learning system, with useful knowledge applied outward to each other and upward to Washington, their co-implementation partner. George Meyer, Secretary of the Wisconsin Department of Natural Resources,

Big Questions Do states have the policy tools to “do” climate policy? Do states have the political will to do climate policy?

STATE CLIMATE POLICY OPTIONS Meeting of the Illinois Climate Change Advisory Group Michael A. Bilandic Building, 160 N. LaSalle St., Room C500 Chicago, IL February 14, 2007 Governor Rod R. Blagojevich Climate Change Advisory Group

8 Suggested priorities: Multi-Sector: -Carbon offset requirements for existing and/or new large stationary combustion sources -Establish residential and commercial energy efficiency construction codes beyond international standards -Incentives for CHP and boiler construction and upgrades -Incentives for water conservation appliances and equipment -State-level cap-and-trade (including options to join RGGI or other systems)

9 Electric Power: -Carbon performance standards for electricity generation and/or procurement -De-couple electric and natural gas utility revenues from sales -Distributed generation regulatory reform (real-time pricing, net metering, interconnection, standby rates) -Energy efficiency standards for appliances and equipment -IGCC with carbon capture & storage portfolio standard -Require utilities to factor CO2 into procurement and planning Suggested priorities:

10 Transport: -Develop and finance "smart growth" initiatives and expand/improve alternative modes of transport -GHG emission standards for automobiles -Incentives for fuel efficient vehicles -Renewable fuels standard (RFS) and/or low-carbon fuels standard Suggested priorities:

11 Agriculture: -Incentives to reduce nitrogen application in crop fertilization -Programs to encourage forest management, reforestation, tree- and grass-planting Suggested priorities:

12 Commercial / Industrial: -Encourage or require reductions in emissions of high GWP gases (N 2 O, HFCs, PFCs, SF 6 ) -Energy efficiency standards for commercial and industrial generators Fugitive / Waste: -Encourage or require capture of methane from landfills, wastewater treatment plants, and/or coal mines Suggested priorities:

Barriers to State Climate Action 1.Political will 2.Budget constraints 3.Upfront technology costs 4.For climate policy, impacts are dispersed across economy

Major Co-Benefits of Climate Policy Smart Growth = reduced fuel and infrastructure costs + improved AQ + urban revitalization + open space protection Energy Efficiency = reduced fuel costs + improved AQ + economic benefits from new techs + energy security Renewable Energy = jobs and other economic benefits + energy security + improved AQ Fuel Switching = Improved AQ + economic benefits Tax Shifting = Clear market signals + economic and fiscal benefits + improved AQ

The Adoption of RPS: RI PAVT WINYMT NVTXMDIL MNMENJNMHIDC IAMACTAZCACODE

Approaches to Co-Benefits 1. Allocating State Money - Directing financial outlays toward climate-friendly investment 2. Moving Markets - Using state financial leverage to move new product markets 3.Regulations or Incentives - Choosing optimal type of policy

Allocating State Money (1) States have limited financial resources Targeted allocation strategies and rules can help achieve co-benefits – E.g., requiring transportation funds to satisfy smart growth criteria can provide economic, air quality, and climate benefits

Allocating State Money (2) Maryland: Priority Funding Areas – limits infrastructure spending to targeted development zones in established communities New York: State Energy Plan - redirects State funding toward energy-efficient transportation alternatives New Jersey: Executive Order 4 - requires that state funding be consistent with smart growth principles

Moving Markets (1) State spending can spur markets through targeted procurement New technologies hampered by higher incremental costs Purchases of climate-friendly products can help realize economies-of-scale – E.g., state purchases of renewable electricity and alternative fuel or hybrid vehicles

Moving Markets (2) New York: Executive Order 111 – new vehicles purchased by state agencies must use alternative fuels, and 20% of state energy must be from “green power”, by 2010 Maryland: Energy Efficient Product Procurement – state-purchased energy-using products products must be Energy Star or in top 25% of energy efficiency for product type Massachusetts: High-efficiency Vehicle Procurement – replacement of non-essential state fleet SUVs with efficient vehicles, and prevention of future SUV purchases

Regulation or Incentives (1) Regulation examples – technology standards, emission caps, portfolio standards Incentive examples – tax credits, production credits, emissions trading Tradeoff between policy based regulation or market incentive – Regulation = less politically popular, less impact on state budget, broader participation, more enforcement – Incentives = more politically popular, more impact on state budget, voluntary participation, less enforcement

Regulation vs. Incentives (2) Regulation: – California: Renewable Portfolio Standard (RPS) - 20% by equates to between 3,000 and 8,000 MW of additional RE – Massachusetts: System Benefit Charge - over $150 million per year to finance RE Incentive: – Michigan: NextEnergy Program – 20-year state and local tax exemption for alternative energy producers and system designers – Minnesota: Renewable Energy Production Incentive - generation incentive payments of $0.015 per kilowatt-hour (kWh) for qualifying renewable energy technologies

Conclusions about policy tools Range of cost-effective opportunities for climate policy Many have range of economic and environmental co-benefits State policymakers have several policy options available Policies often overlap – Emphasis on complementary approaches

“Laboratories of Democracy” Many environmental laws enacted by states have charted the way for later passage of major national legislation State early action, in 1980’s, to address acid rain had major impact on passage of national legislation – Acid rain laws initially introduced in a number of states California’s air quality laws laid groundwork for national air quality law passed in early 1970

25 Good News: States are on the move…

Regional GHG Initiatives

Vehicle Emissions Standards

Renewable Portfolio Standards

Source: Barry Rabe, States on Steroids Variations Among States in Emissions Growth,

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First mover dilemmas Tensions between rewarding first movers and gaining participation of late adopters Design decisions have consequences for first movers and late adopters – Preemption – Stringency of caps – Baseline – Allowance allocations Tools to address tensions – Grants – Partial preemption

The Adoption of RPS As of 2005, 22 states and DC have adopted RPS. State Goal ☼ PA: 18%¹ by 2020 ☼ NJ: 22.5% by 2021 CT: 10% by 2010 MA: 4% by % annual increase WI: requirement varies by utility; 10% by 2015 Goal IA: 105 MW MN: 10% by 2015 Goal + Xcel mandate of 1,125 MW wind by 2010 TX: 5,880 MW by 2015 *NM: 10% by 2011☼ AZ: 15% by 2025 ☼ NV: 20% by 2015 ME: 30% by 2000; 10% by 2017 goal - new RE State RPS *MD: 7.5% by 2019 ☼ Minimum solar or customer-sited requirement * Increased credit for solar or customer-sited ¹PA: 8% Tier I, 10% Tier II (includes non-renewable sources) HI: 20% by 2020 RI: 15% by 2020 ☼ CO: 10% by 2015 ☼ DC: 11% by 2022 ☼ NY: 24% by 2013 MT: 15% by 2015 *DE: 10% by 2019 IL: 8% by 2013 VT: RE meets load growth by 2012 *WA: 15% by 2020 Note: Renewable portfolio goal is voluntary, as opposed to a renewable portfolio standard, which is generally enforced by an appropriate state regulatory agency.

Environmental Energy Technologies Division Energy Analysis Department State RPS Activity Gathering Steam restructuring bust restructuring boom new growth Recently Adopted RPS: CO, HI, MD, NY, RI (2004); DC, DE, MT (2005) Recently Revised RPS: CA, NJ, NM, PA (2004); CT, NV, TX (2005); WI, NJ (2006)

State RPS Program Context Load Covered: Roughly 40% of U.S. load covered by a state RPS or a renewables purchase obligation RPS Development: Most policies emanated from state legislation, but some from regulatory action (e.g., NY, AZ) and one from a state ballot initiative (CO) Operating Experience: Experience with policy is growing, but few states have >5 years experience

Environmental Energy Technologies Division Energy Analysis Department RPS Policies Are Relatively New, But RE Capacity Built in RPS States is Growing Source: Black & Veatch 2006 Note that RE capacity built in RPS states may not all be “caused” by the RPS, and that RE capacity built in non-RPS states may supply nearby state RPS policies.

Environmental Energy Technologies Division Energy Analysis Department Looking Ahead, Existing RPS Policies Could be a Major Driver of New Capacity EIA estimates ~9,000 MW of new RE capacity, assuming that all does not go well UCS estimates ~32,000 MW of new renewable energy capacity by 2017, if all goes well Source: UCS

Environmental Energy Technologies Division Energy Analysis Department The Most Aggressive State RPS Policies Require an Annual Growth of ~1% Source: UCS

Environmental Energy Technologies Division Energy Analysis Department Development in RPS States Predominantly, But Not Entirely, Wind So Far Source: Black & Veatch 2006 Total Renewable Energy Additions in RPS States 4,450 MW (nameplate); 1,320 MW (average)

Environmental Energy Technologies Division Energy Analysis Department Nearly Half of All Wind Project Development From Was RPS-Related The EIA loosely attributes 1,998 MW out of 3,275 MW (61%) of installed wind in to states with RPS policies

Environmental Energy Technologies Division Energy Analysis Department Recent Examples of the Impact of RPS Policies on Wind Power Development Texas700 MW installed in 2005 California60 MW installed in 2005; new wind under contract: MW (IOUs), 530 MW (POUs) New YorkFour contracts for 317 MW in NY, MD, PA, NJ Colorado775 MW in negotiations; 60 MW under contract Wisconsin200 MW to be built in 2006 (due to We Energies goal) Minnesota145 MW installed in 2005 New Mexico140 MW installed in 2005 New England and PJM Development activity in New England and PJM in part as result of state RPS policies

Environmental Energy Technologies Division Energy Analysis Department Other Technologies Will Also Be Supported Over Time California’s RPS procurements are governed by “Least Cost, Best Fit” criteria...and... Wind may not always provide the “Best Fit” (even if “Least Cost”) EIA estimates that 93% of RPS-driven RE capacity will be wind on a going-forward basis. RPS cost studies predict – in aggregate – that ~60% of RE deliveries are likely to be wind, while Global Energy (a consulting firm) predicts ~75%. Some RPS policies yielding diversity of resources, even without technology bands: California, Nevada, New England

Race to the Top: RPS Rabe Case studies on five states: Texas, Massachusetts, Nevada, Pennsylvania, and Colorado Driving Forces: – Transcending Partisan Boundary: “Regardless of partisan composition of state government, these policies (RPSs) have consistently drawn a rather broad coalition of support.” – Renewable Energy Developers: “Renewable energy developers are far more visible and influential in RPS deliberations than conventional environmental advocacy groups” – Economic Benefits: “perhaps one of the biggest factors…has been a commonly held perception that promotion of renewable energy through an RPS is in the economic interest of an individual state.” Especially, “…this labor benefit has fostered discussion in many state capitals about an anticipated ‘job multiplier’ effect of renewable as opposed to conventional sources.”

Which Alaska in 2050? (Scientific American, Sept. 2006)

$7 billion

Environmental Energy Technologies Division Energy Analysis Department RPS Design Varies Substantially From One State to the Next Structure, Size and Application Basis (energy vs. capacity obligation) Structure (e.g., single tier or multiple tiers) Percentage purchase obligation targets Start date Duration of purchase obligation Resource diversity requirements or incentives Application to LSEs - Who must meet targets? Product- or company-based application Eligibility Geographic eligibility Resource type eligibility Eligibility of existing renewable generation Definition of new/incremental generation Treatment of multi-fuel facilities Treatment of off-grid and customer-sited facilities Administration Regulatory oversight body(ies) Compliance verification (TRCs or contract-path) Certification of eligible generators Compliance filing requirements Enforcement mechanisms Cost caps Flexibility mechanisms (banking, borrowing, etc.) Implementing future changes to the RPS Contracting standards for regulated LSEs Cost recovery for regulated LSEs Interactions with other renewable energy and environmental policies

Environmental Energy Technologies Division Energy Analysis Department Common Design Pitfalls Overly Broad Definitions of Eligible Resources Existing biomass in Maine, Connecticut Lenient Geographic Boundaries Can enlarge the market for RECs, but may also moderate need for new renewables and reduce local benefits (e.g., PA, MD, NJ, DE, DC, NY) Overly Stringent Requirements Requirements that ramp up so fast as to not be achievable may not be politically sustainable (MA, NV, CA) Force Majeure Clauses and Cost Caps Compliance flexibility should be encouraged, but new RPS policies increasingly including a lot of “wiggle room” to possibly allow escape from full compliance, or establishing low cost caps (e.g., MT, HI, MN, PA, NV) Inadequate Enforcement Enforcement motivates action; where full compliance is apparently not being achieved (NV, CA, AZ)...will penalties be used to enforce compliance?

Environmental Energy Technologies Division Energy Analysis Department Common Design Pitfalls (cont.) Narrow Applicability RPS applied unequally will limit impact of policy, create “unfair” competition (CT and PA original RPS policies) Lack of Long-Term Contracts Major problem in Northeast, where retail competition exists and where renewable energy sources are more expensive Policy Instability Uncertainty in RPS duration, target, or eligible technologies can impede development (e.g., CT, MA, AZ etc.) Transmission Bottlenecks TX, MN and CA trying to be more proactive with transmission planning and construction, but transmission remains a key barrier in many states Design Complexity Is the complexity inherent in the California RPS worth it?

Environmental Energy Technologies Division Energy Analysis Department What Makes a Strong RPS? Policy Design Requirements Broad applicability (limited exemptions ok) Carefully balanced supply-demand (ensures new supply, but not overly aggressive) Sufficient duration and stability of targets (provides market confidence) Well-defined/stable resource eligibility rules (ambiguity erodes confidence) Well-defined/stable out-of-state resource eligibility (ambiguity erodes confidence) Credible & effective enforcement (to ensure compliance) Flexible verification (simplifies oversight, contracting; may lower compliance costs) Adequate compliance flexibility (to ensure that targets can be achieved at low cost) Contracting standards/cost recovery for regulated utilities and providers of last resort (to ensure reasonable compliance effort, and long-term contracts) Product-based (not company-based) compliance (supports voluntary sales)

Environmental Energy Technologies Division Energy Analysis Department State RPS Structure and Vintage Eligibility STRUCTURE One Tier with Only New Eligible One Tier with New and Existing Eligible Two Tiered by Vintage Two Tiered by Technology Arizona (proposed) Iowa Massachusetts Montana (out-of-state) Earlier Xcel (MN) California (partial) Colorado Hawaii Maine Minnesota Montana (in-state) New Mexico New York (partial) Nevada Pennsylvania (for RE) Texas (partial) Wisconsin Delaware (partial) Rhode Island Connecticut Maryland New Jersey Texas (partial) Washington, DC Technology Bands/ Set Asides Arizona Colorado Minnesota Montana Nevada New Jersey New York Pennsylvania Washington, D.C.

Environmental Energy Technologies Division Energy Analysis Department Different Approaches Are Used for Geographic Eligibility/Deliverability In-state requirement: IA, MN (original Xcel mandate), HI In-state delivery requirements of varying stringency: – In-state transmission interconnection requirement: NV, TX – In-state delivery requirements: AZ, CA, WI, MN, NM, NY Delivery can be required on a real time, monthly, or yearly basis Broader regional delivery requirements of various types: – Unbundled REC trade within larger region with delivery to region: CA (multi- jurisdictional utilities), CT (after 2010), CO(?), DE, MA, ME, NJ, PA, RI (WA proposal a special case because delivery required to state) – Unbundled REC trade within larger region with delivery to that region, and possibility of REC trade from nearby states without delivery if certain conditions are met: CT, DC, MD In-state encouragement: CO (multiplier), DE (multiplier), AZ (in-state solar multiplier before 2005); NM (in-state preference) DG must often – not always – be located in-state (exceptions: CT, PA)

Environmental Energy Technologies Division Energy Analysis Department Assessing the Tradeoffs in Determining Geographic Eligibility Potential cost reduction from expanded geographic scope – The wider the net, the lower the costs Supply-demand balance that drives new investment – Risk of absorbing existing/non-additional RE as geography expands Relationship between benefits and location/delivery of RE – Economic development: in-state – Fuel diversity: delivered to state – Environmental Local: delivered to state Regional: delivered to region Global climate change: anywhere where fossil is displaced Interstate commerce clause – In-state requirements very problematic – In-state multipliers worrisome – Stringent in-state delivery, and anything more lenient, should be ok

Caveats Connecticut Mulls Rollback on Clean Energy? Midwest Turn Its Back? NJ- Christie Larger lesssons – political fluctuations – cobenefits